Income Tax (Earnings and Pensions) Act 2003 section 532

Modified tax consequences following disqualifying events

Section 532 explains how the income tax charge on exercising an Enterprise Management Incentives (EMI) share option is calculated when a disqualifying event has occurred and the option is exercised more than 90 days after that event.

• When a disqualifying event occurs and the EMI option is exercised more than 90 days later, the favourable EMI tax treatment is partially withdrawn, and a modified income tax charge applies on the gain arising after the disqualifying event.
• For options originally granted at market value, the taxable gain is the post-event gain (PEG) minus the cost of the option (ACO); for options granted below market value, the gain is calculated as (CMV + PEG) minus (ACO + ACS), where CMV is the chargeable market value and ACS is the price paid for the shares.
• The post-event gain (PEG) is the increase in market value of the shares between the date immediately before the disqualifying event and the date the option is actually exercised, meaning any growth in value up to the disqualifying event remains sheltered from income tax.
• A safety net ensures that the modified EMI rules never produce a higher income tax charge than would have applied if the option had not been an EMI option at all — if the standard charge would be lower, the standard charge applies instead.